Alabama Supreme Court Reverses $279 million in Pricing Verdicts Against Major Pharmaceutical Companies

October 19, 2009

On Friday, October 16, 2009, the Alabama Supreme Court reversed three verdicts in favor of the State of Alabama against AstraZeneca Pharmaceuticals LP, SmithKlineBeecham Corporation d/b/a GlaxoSmithKline ("GSK") and Novartis Pharmaceuticals Corporation, and directed that judgment be entered in favor of each of the three companies. The State of Alabama sued all three, along with approximately seventy other pharmaceutical manufacturers, alleging that the companies defrauded the State by publishing allegedly "inflated" Average Wholesale Prices ("AWPs"), which the State used as the starting point in calculating its payments to pharmacies for prescription drugs dispensed to Medicaid patients. The State claimed that it had understood that AWPs were equal to the price pharmacies paid for the drugs when, in fact, pharmacies typically paid between 16.6% and 20% less than AWP for AstraZeneca, GSK and Novartis products.

At their trials, the companies presented evidence that State Medicaid officials understood since at least the early 1980s that pharmacies paid less than AWP for prescription drugs and made a conscious policy decision to pay pharmacies a reimbursement that was less than AWP but more than the pharmacies paid for the drugs, in order to capture some of that discount for the State while paying the pharmacies a small profit to serve Medicaid patients. At its trial, Novartis presented evidence that the Medicaid officials had heard from pharmacies that lowering reimbursements could lead to pharmacies declining to participate in the Medicaid program, and elicited admissions from the Medicaid officials that they were concerned about maintaining their network.

The trials resulted in verdicts against all three companies, and all three appealed to the Alabama Supreme Court. The Supreme Court reversed, observing that the sine qua non of the State's case was its claim that it did not know that the prices published by the manufacturers were suggested or list prices, and that transaction prices were lower, and that that claim was belied by the evidence at trial. The Court held that the State could not have relied on that claimed belief and that, if it had, such reliance was not reasonable as a matter of Alabama law. As a result, the cases never should have been put to the juries in the first place.

Kaye Scholer led the defense of Novartis, working with the Alabama firms of Capell & Howard in Montgomery and Lightfoot Franklin & White in Birmingham.

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